News from DNB Markets

(14.04.2011)
The high and increasing US debt burden is worrying. As a consequence the US President Barack Obama yesterday set a goal of cutting the US budget deficit by USD 4 trillion over 12 years through a mix of tax increases and cost cuts. The Republicans opposes to the plan and say they will not accept any sort of tax increases.

By Camilla Viland, Analyst at DNB Markets

In a speech yesterday Presdient Barack Obama seemed clearly worried about the rising US debt. He warned that if creditors started to worry that the US would not be able to repay the debt, it could drive up interest rates for everyone who borrows money- making it harder for businesses to expand and hire, or for families to take out a mortgage.

As a consequence of this Obama proposes to cut the US budget by USD 4 trillion over the next 12 years and to reduce the US deficit from above 10 per cent as it is today to 2.5 per cent within 2015. Obama also proposed to end the Bush era tax cuts for the wealthiest Americans, seeking USD 770 billions in savings in non-security discretionary spending and savings of USD 400 billion in current and future defense spending.

Republican leaders shortly after the speech signaled that they would fight Obamas plan. Republicans say they will not accept any sort of tax increases. The differences between the two parties are large. Last week Paul Ryan from the Republican Party presented his plan to combat the budget deficits. Ryan plan relies on deeps cut in federal spending. At the same time he wants to reduce top income and corporate tax rates from 35 to 25 per cent. The debate over fiscal policy is likely to continue going forward. After agreeing on a 2011 budget last week, Obama is now preparing to battle over raising the debt limit of USD 14,300 billion to avoid a default and to fight over the next year's budget.

Interest rates on US debt fell in the aftermath of Obama's speech. The stock market also declined, but later came back again and ended the session up. One reason for this may be a slightly optimistic Beige Book. According to the report from the Federal Reserve economic activity has continued to improve lately and most districts said the gains were widespread across sectors. Manufacturing continues to lead, with virtually every district citing examples of steady improvement. Most districts also report of at least slight gains in consumer spending. Loan demand was either unchanged or up.

The housing market is however still seen as very poor. Most districts said the labor market was improving, but wage pressures were described as weak or subdued. But higher commodity costs were widely reported to be putting increasing pressures on prices. In summary the report indicated that the economic recovery was continuing, although at a moderate pace. There are however still large uncertainties surrounding the economic outlook and the development in commodity prices is worrying.

The US retail sales figures released yesterday also indicate that businesses start to feel the rising commodity prices. Retail sales rose by 0.4 per cent in March. This is the lowest growth rate seen since June last year. According to Reuters inflation March is estimated at 0.5 per cent (figures will be released tomorrow). If, so the growth in retail sales is eaten up by rising prices. In contrast to the Beige Book report, most US key figures released lately has indicated that the pace of the economic recovery is about to abate. The retail sales figures support this impression.